“Well, we’re gonna change that!”
I’m gonna start today with a history lesson … and that history lesson is
authentically documented via a then “Big 8” accounting firm, and I’ve
provided it before to readers in my other blog … and it’s simply this: over a
3 year period I started with about $35K, and I turned it into about
$1.4 million … and what makes that pertinent today, is that the same
principles I used in last night’s EURJPY trade to signals service subscribers,
is EXACTLY the same from back-in-the-day when I traded Swiss Francs,
British Pounds, Japanese Yen, and/or SP500 futures from the floor.
Back then, it was a combination of futures and futures options [calls & puts]
with very near term expiration's, and basically utilizing what’s known in the
trade biz as a “Christmas tree” positioning algorithm … the concept is very
simple … “one side is positioned in futures, and the other side is positioned
opposite via long calls or puts in a ratio” … e.g., long 1 futures & long 2 or 3
puts, OR short 1 futures & long 2 or 3 calls. It’s important to note here, that
this strategy makes you LONG GAMMA, not short gamma where the entire
rest of the world gets destroyed in a fast moving market. Short gamma means
you want a quiet market, long gamma just the opposite, where the crazier the
better. Essentially it’s a case of pick your poison … when SHTF via short
gamma you just get a bullet to the back of the head, whereas when SHTF via
long gamma, it’s like starving to death … from my perspective, it’s better to
deal with hunger than a bullet, and history proves my point!
In the trading tutorial for NADEX Call Spreads, I didn’t bring this strategy
up, but it can be utilized using the same concepts … simply use one call spread
to be long/short that isn’t close to a ceiling / floor, and thus trades with the
market up/down, and use a 2X strategy to be long the other side utilizing the
ceiling / floor as price protection … essentially this is a “synthetic Christmas
tree strategy".
What makes the FX crosses of EURJPY & GBPJPY so dangerous to traders,
is NOT the days when the market goes straight up/down 150+ PIPS … it’s
when the market goes 50 PIPS up, then 80 PIPS down, then 50 PIPS up, then
100 PIPS down, before finally rallying 100 PIPS … you get caught up in those
cross currents of volatility and panic, and you’re gonna have a really bad day.
The purpose and premise of the “synthetic Christmas tree strategy” is to make
money on one side, and then let the other side become a “free trade” the rest of
the day … you can do it on either side of the market, and it’s not a market call
on direction, it’s a market call on the fact this shit is mostly crazy about 99.9%
of the time and will reverse like nobody’s business and hurt most traders … we
simply don’t care where it goes, only that it goes somewhere.
When the side of the market makes you money on the “1 lot”, which is the side
you have most exposure, take profit when the market is hitting a high/low for
the day, then leave the other side to “ride free” cuz it’s the side protected by the
floor / ceiling … when the side of the market makes you money with the
“2 lot”, after you ring the register you have to liquidate immediately the “1 lot”
cuz it has the most exposure, so there isn’t a free ride on this side.
I can hear the question now, so I’ll answer it … you can use any criteria you
want for determining which side of the market to do the “Christmas tree”
… it doesn’t matter … what matters is you definitely ring the register when
up more than 15% on risk capital from the most exposed side, cuz that leaves
you with a free trade that more than you know will make some big bucks over
time.
Last night I recommended a trade in EURJPY, utilizing the “synthetic
Christmas tree strategy” I outlined above … I could have chosen either up or
down, but felt with 2 days in a row down, maybe the market had a slight
advantage to the upside, although action has been sloppy to be sure … in any
event, I was wrong on direction, but still made money … directly below the
trade tickets near the open.
click to enlarge
As the market goes lower, thus placing us up about 20% on MAX risk capital
for the trade, at the time I nailed the bottom of the move right around 124.50,
before the BOE report. This leaves us still long the 2 lot off the floor in case
the market rallies later, but for now it’s got no bid at the floor. The trade
liquidation of the exposed side directly below.
click to enlarge
It should be noted, that the margin at NADEX for this trade is higher than
doing equal floor & ceiling call spreads, simply cuz margin is calculated from
the MAX loss of the position to the floor or ceiling, whichever is appropriate.
NADEX computers don’t actually calculate your risk in multi positioned
trades, only single isolated positions.
Our total max risk in the EURJPY trade was $39 per the 2X1 synthetic
Christmas tree, assuming the other side expires at the floor for max loss on
the 2 lot long position. Our total return was right around 15% after
commissions. In hindsight, which is always easy, the same position scheme in
GBPJPY would have worked beautifully as well, but the pricing last night in
GBPJPY was too high IMHO … as I’ve said before, PIPS matter.
OK, I’m gonna assume the 2 lot long expires on its floor, so nothing else today.
Onto tomorrow, where I’ll have more trading details about the “synthetic
Christmas tree strategy” … I’m outta here … until tomorrow mi amigos
… Onward & Upward!!
-vegas
OUR NADEX SIGNALS SERVICE IS UP & RUNNING … DAILY
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